DR Leslie Wilfred Knight v. Minister of National Revenue, [1984] CTC 2643, 84 DTC 1586

Tremblay, TCJ:—This case was heard on December 8, 1983, in the city of Winnipeg, Manitoba.

1. The Point at Issue

The point at issue is whether the appellant is correct, in the computation of his taxation year 1975, to claim a capital loss of $22,000. The appellant indeed contends that the 200 common shares of Crescent Enterprises Ltd sold for $11,000 in 1975 had a value of $33,000 in December 1971. The respondent however, contends that the Valuation Day Value was $15,400. However because of the median value rule, it results in no loss and no capital gain. The appellant had not made an election pursuant of subsection 26(7) of Income Tax Application Rules.

2. The Burden of Proof

2.01 The burden is one on the appellant to show that the respondent’s assessments are incorrect. This burden of proof results especially from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumptions of fact on which the respondent based the assessments are also deemed to be correct. In the present case, paragraph 5, 6, 7 of the respondent’s reply reads:

5. In reassessing the Appellant for his 1975 taxation year, the Minister of National Revenue made, among others, the following assumptions of fact:

(a) In 1975 the Appellant sold 200 common shares for proceeds of disposition of $11,000.00.

(b) The cost of the shares was less than $11,000.00.

(c) The fair market value of the 200 shares on V-day was $13,500.00.

(d) There had been a dividend of 1971 Undistributed Income on Hand of $23,375

per share on the common shares — totalling $4,675.00 for the 200 shares.

(e) Pursuant to Income Tax Application Rules 26(3) and section 53(2) of the Income Tax Act, the Appellant’s adjusted cost base was less than the proceeds of disposition.

(f) With the result that there was a capital gain.

(g) The Appellant did not make an election pursuant to ITAR 26(7).

6. When reassessing the Appellant, the Minister of National Revenue ignored the capital gain and assessed no gain and no loss in respect of the sale of the shares.

7. Subsequently, at the Objection stage, the Minister of National Revenue made a further valuation in which he estimated the Fair Market Value of the 200 shares on Valuation Day at $15,400.00.

3. The Facts

3.01 The appellant, a medical doctor and a farmer, in his examination-in-chief testified that:

(a) In 1975, he claimed a capital loss of $22,000 pursuant to the schedule 2 of his income tax return (Exhibit A-l).

(b) On May 12, 1975, he sold 200 common shares he owned in Crescent Enterprises Ltd, to a Mr Pravhat Maiti for $11,000 (Exhibit A-2).

(c) Crescent Enterprises Ltd, had been incorporated on June 25, 1962, the main object being “to construct, purchase and otherwise acquire real and personal estate for holding and investment purposes’’ (Incorporation articles) (Exhibit A-3). The two other shareholders were a Dr Whitfield and a Dr Grant. Each of them owned 200 common shares of the company purchased at $1 each share.

(d) Their first undertaking was to construct a building to provide medical office and drugstore space on Crescent Street, Souris, Manitoba. The building was officialy opened in April 1963.

(e) At the end of December 1971, the Company had liquid assets of around $10,000 plus fixed assets at cost of approximately $64,000 and $1,263 of current liabilities. This was pursuant to the financial statements of the said company prepared by the firm of accountants, Meyers, Dickens, Norris, Penny & Co, CA (Exhibit A-4).

(f) A municipal certificate of assessment under the seal from the secretarytreasurer of the town of Souris was filed as Exhibit A-5. It shows that on December 31, 1971, the assessment was: land — $3,330, building — $22,930, total — $26,260.

(g) A description of the land and plan to the building issued by the Department of Municipal Affairs of Manitoba was filed as Exhibit A-6.

(h) On April 3, 1974, the company was informed by their insurance agent in Souris, G D Martin Agencies Ltd, that the fire insurance policy covering the building should be increased to $115,000 (Exhibit A-7). Two photos of exterior and interior of the building were filed as Exhibits A-8 and A-9.

(i) The shareholder register of the company (Exhibit A-10) shows that from 1962 to 1975, the appellant was owner of 200 common shares.

(j) The by-law No. 1, issued on July 19, 1962, was also filed as Exhibit A-11. Paragraph 15 of the by-law gives the original shareholders an opportunity to purchase shars of the other shareholders should they wish to sell. Disposition was followed when in 1975, because he was not well and wanted to retire, he sold his shares to Dr Maiti. The sale price of $11,000 ie as the best he could have to attract a new medical doctor as purchaser.

(k) In 1971, considering the property, which was worth about $100,000, his part was about $33,000.

3.02 In cross examination, the appellant testified that he never filed the form 2076 entitled “Valuation Day Value” election for capital properties owned on December 31, 1971 (Exhibit R-1). This form is for use by an individual when electing under subsection 26(7) of the Income Tax Act Application Rules 1971, in the year in which the first dispositon of capital property occurs, except capital property disposed of for the same amount as its fair market value on valuation day.

3.03 Mr Michael Krutish, Chief of the Tax Roll in the Winnipeg Taxation Centre, testified that after research it was not possible to find any evidence that a form 2076 was filed by the appellant.

3.04 Pursuant to the respondent the fair market value on valuation day of the 200 shares was $15,400. It was a liquidation value of equity. This appears from a document prepared by the respondent. It is as follows:

Crescent Enterprises Ltd

Estimated Value of 200 Common Shares as at December 31, 1971 and Calculation of Adjusted Cost Base

(1) Liquidation of Value of Equity

Current assets — cash and investments	$10,336
Fixed Assets — estimated fair market value
(Building — $67,200, Land — $6,000)	73,200
Less: Current Liabilities	1,263
Adjusted Net Asset Value	82,273
Less: Estimated taxes on recaptured depreciation
(Cost $63,000, UCC $38.000) — say $29,000
@ 25%	(7,250)
Estimated costs of liquidation and disposition —
5% of assets	(4,000)
Cash available for liquidation	$71,023
Taxes on dividend distribution
1971 U.I.O.H. — $48,590 @ 15%	(7,288)
Post-1971 earnings — say $20,000 @ 30%	(6,000)
Liquidation Value	$57,735
Rounded to 600 shares @ $96.25/share	$57,750

(2) Pro rata value of 200 shares @ 96.25/share	$19,250
Less: Discount for minority interest — 20%	3,850
Value of 200 shares @ $77.60	$15,400
(3) Adjusted Cost Base — 200 share
V-Day value — $77.60/share	$15,400
Less: Dividend from 1971 UIOH
— $23.375 per share X 200 shares:	4,675
Adjusted Cost Base	$10,725

3.05 It is not in dispute that the appellant received a dividend of $4,675 ($23,375 per share X 200).

3.06 It was neither in dispute that the cost of the shares for the appellant was $11,000.

4. Law — Cases at Law — Analysis

4.01 Law

The main provisions of the Income Tax Act, of the Income Tax Application Rules (ITAR) and of the Regulations are sections 38, 39, 40, 53(2)(a), of the Act, section 26(3), 26(7) of ITAR and section 4200 of Regulations; they shall be quoted in the analysis if required.

4.02 Analysis

4.02.1 The first point at issue is whether provision 26(7) of ITAR concerning the election was met. For that purpose, it is necessary to quote ITAR 26(7) and Regulation 4700:

Sec. 26(7)

(7) Election re cost. Where, but for this subsection, the cost to an individual of any property actually owned by him on December 31, 1971 would be determined under subsection (3) or (4) otherwise than by virtue of subsection (5) and the individual has so elected, in prescribed manner and not later than the day on or before which he is required by Part I of the amended Act to file a return of his income for his first taxation year in which he disposes of all or any part of such property, other than

(a) personal-use property of the individual that was not listed personal property or real property,

(b) listed personal property, if his gain or loss, as the case may be, from the disposition

thereof was, by virtue of subsection 46(1) or (2) of the amended Act, nil,

(c) his principal residence, if his gain from the disposition thereof was, by virtue of paragraph 40(2)(b) of the amended Act, nil,

(d) personal-use property of the individual that was real property (other than his principal residence), if his gain from the disposition thereof was, by virtue of subsection 46(1) or (2) of the amended Act, nil, or

(e) any other property, the proceeds of disposition of which are equal to its fair market value on valuation day,

the cost to him of each capital property (other than depreciable property, an interest in a partnership or any property described in any of paragraphs (a) to (e) that was disposed of by him before that taxation year) actually owned by him on December 31, 1971, shall be deemed to be on its fair market value on valuation day.

Sec. 4700. Any election by an individual under subsection 26(7) of the Income Tax Application Rules, 1971 shall be made by filing with the Minister the form prescribed.

Pursuant to the evidence (para. 3.02, 3.03) it is obvious the form 72076 was not duly filed. The counsel for the appellant however, contends that in claiming in the schedule 2 of his 1975 income tax return a loss of $22,000 giving the proceeds of disposition $11,000 and the adjusted cost base $33,000, the appellant in substance met the requirements of 26(7).

First, this is not pursuant to “the prescribed manner” provided in ITAR 26(7) and in 4700 of the Income Tax Regulations. Such a requirement generally must be strictly followed. Maybe the Court would have been less strict if in the schedule 2 of the tax return, the appellant would have clearly stated his intention of election to establish the cost of all capital property or at least the Crescent shares owned by him on December 31, 1971 as being the fair market value on Valuation Day or referring to ITAR 26(7). As it appears in the schedule 2 filed with the tax return, there is nothing to say that the appellant owned the shares on December 31, 1971. Unfortunately, the Court cannot conclude that in substance, the requirements of ITAR 26(7) were met.

Therefore, median rule provided in ITAR 26(3) applies to determine the deemed value of the shares on December 31, 1971.

4.02.2 The provisions 26(3) of ITAR reads as follows:

Sec. 26(3)

(3) Cost of acquisition of capital property owned on December 31, 1971. For the purpose of computing the adjusted cost base to a taxpayer of any capital property (other than depreciable property or an interest in a partnership) that was owned by him on December 31, 1971 and thereafter without interruption until such time as he disposed of it, its cost to him shall be deemed to be the amount that is neither the greatest nor the least of the following three amounts, namely:

(a) its actual cost to him or, if the property was an obligation, its amortized cost to him on January 1, 1972,

(b) its fair market value on valuation day, and

(c) the amount, if any, by which the aggregate of

(i) his proceeds of disposition of the property,

(ii) all amounts required by subsection 53(2) of the amended Act to be deducted in computing its adjusted cost base to him immediately before the disposition,

and

(iii) all amounts described in clause (5)(c)(ii)(B) that are relevant in computing

its adjusted cost base to him immediately before the disposition,

exceeds the aggregate of

(iv) all amounts required by subsection 53(1) of the amended Act (other than paragraphs (f.1) and (f.2) thereof) to be added in computing its adjusted cost base to him immediately before the disposition, and

(v) all amounts described in clause (5)(c)(i)(B) that are relevant in computing its adjusted cost base to him immediately before the disposition,

except that where two or more of the amounts determined under paragraphs (a) to (c) in respect of any property are the same amount, that amount shall be deemed to be its cost to the taxpayer.

Let us make the application of this Rule with the contention of both parties concerning the fair market value on Valuation Day.

Section 26(3) “. .. neither the greater nor the least of the following three amounts:”

At this level therefore, the median would be $15,675 for the appellant and $15,400 for the respondent. Now to find the adjusted cost base one must take into consideration provision 53(2)(a)(i). It reads as follows:

Sec. 53(2)

(2) Amounts to be deducted. In computing the adjusted cost base to a taxpayer of property at any time, there shall be deducted such of the following amounts in respect of the property as are applicable:

(a) where the property is a share of the capital stock of a corporation resident in Canada,

(i) any amount received by the taxpayer after 1971 and before that time as, on account or in lieu of payment of, or in satisfaction of, a dividend on the share (other than a taxable dividend or capital dividend),

	Appellant	Respondent
Appellant’s median	$15,675
Respondent’s median		$15,400
Less Dividends	4,675	4,675
	$11,000	$10,725
		$10,725
Proceeds of Disposition	11,000	11,000
No gain no loss	0
Capital gain		275

4.02.3 From the adduced evidence, and the burden of proof on the appellant’s shoulders, the Court must maintain the reassessment issued by the respondent.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.